ECB Near Crisis Panic

More signs of desperation out of Europe. Der Spiegel reports:

The European Central Bank wants to spur lending by banks in Southern Europe, but conventional methods have shown little success so far. On Thursday, ECB officials will consider monetary weapons that were previously considered taboo.

The only way to get the European economy going again is to cut taxes, phase out the welfare state and build economic freedom from the ground. But that is about the last thing the clowns in Brussels and Frankfurt want to hear, because in their world, shrinking government – like eating children – is wrong.

Der Spiegel again:

From Mario Drahgi’s perspective, the euro zone has already been split for some time. When the head of the powerful European Central Bank looks at the credit markets within the currency union, he sees two worlds. In one of those worlds, the one in which Germany primarily resides, companies and consumers are able to get credit more cheaply and easily than ever before. In the other, mainly Southern European world, it is extremely difficult for small and medium-sized businesses to get affordable loans. Fears are too high among banks that the debtors will default.

Now, please pay attention to this. We have been told for more than four years now that the current crisis was caused by banks engaging in irresponsible lending. We have been told that it was their credit losses that somehow brought the global economy into a recession and hurled parts of Europe into a depression.

You’d think that with this in mind, with a depression that has wiped out tens of millions of jobs and sent youth unemployment above 20 percent in 20 countries, the last thing that the European Central Bank would wish for is another round of reckless lending.

Well, in a world governed by common sense that would certainly be true. But today’s Europe is not governed by common sense. It is governed by uncommon senselessness. Der Spiegel again:

For Draghi and many of his colleagues on the ECB Governing Council, this dichotomy is a nightmare. They want to do everything in their power to make sure that companies in the debt-plagued countries also have access to affordable loans — and thus can bring new growth to the ailing economies. The ECB has already gone to great lengths to achieve this objective. It has provided the banks with virtually unlimited high credit and drastically lowered the collateral required from the institutions. The central bank has also brought down interest rates to historical lows. Since early November, financial institutions have been able to borrow from the ECB at a rate of 0.25 percent interest. By comparison, the rate was more than 4 percent in 2008.

Private businesses in Greece, Spain, Portugal and the other worst-hit countries are considerably smarter than the big wigs who run the ECB. They are not lending, because they know that in an economy like the Greek one, where GDP has been shrinking for five years in a row, or the Portuguese where GDP is as big today as it was ten years ago, there simply is no market for new investments and business expansion. If anything, business still need to downsize. Which, as Der Spiegel reports, they are still doing:

The only problem is that all those low interest rates have so far barely been put to use. Lending to companies in the euro zone is still in decline. In October, banks granted 2.1 percent less credit to companies and households than in the same period last year.

Apparently willing to ignore elementary banking theory, Mr. Draghi and the Central Bankers are searching for new policy measures. According to Der Spiegel, their search is taking them to the most obscure closets in the ECB attic:

One scenario that drives fear into the hearts of all savers is the so-called negative interest rate. It would mean that the banks would have to pay a fee for the money they park, currently without interest, at the ECB — a kind of penalty interest rate. The idea is to create an incentive for the institutions to loan out extra money to other banks, in Southern Europe for instance.

In other words, they want banks to pump more liquidity into the euro-zone economy. Let’s remember that this is an economy that has been flooded with liquidity over the past few years. One liquidity flood gate is the M1 money supply, which is growing at a speed that is about four times as high as the rate of growth in euro-zone GDP. Another is the bond bailout program where the ECB has pledged to buy any amount of government bonds, for any euro-zone welfare state deemed in trouble.

Now they want to send even more liquidity into an already over-liquified euro-zone economy. But what has not worked yet will not work better now just because it is tried a third time. Instead, this will lead to excess amounts of liquidity floating around in the banking system, which history tells us is a great beginning of a great speculation disaster.

But as Der Spiegel explains, this is not all that the ECB has in mind:

The ECB already lent a helping hand to banks with long-term, cheap loans at the end of 2011 and during early 2012, lending financial institutions a total of €1 trillion for the exceptionally long period of three years — a step it has so far only taken one time. Central bank head Draghi spoke at the time of using “Big Bertha,” a reference to a World War I-era howitzer, to battle the crisis. … [The] ECB is still thinking about a new form of long-term credit. Only this time, the loans would only have a term of one year and they are also supposed to have a specific purpose affixed to them. Banks would only be able to obtain the cheap money if they obliged themselves to pass that money on to companies.

And why would banks want to do that when they are already sitting on more idle cash than they have use for?

But wait – there is more:

The ultimate means the ECB has for keeping market interest rates low is to purchase large quantities of bonds from investors. Other central banks including the Fed in the United States, the Bank of England and the Japanese central bank are already using this instrument more or less successfully. The idea behind “quantitative easing” is that a central bank purchases government or company bonds on the market and, by doing so, drives down prices — e.g. interest rates.In contrast to the ECB’s previous bond buying, the new program would not be aimed at easing financing for individual countries.

Somehow the boneheads at the ECB seem to believe that all the euro zone lacks is access to credit. You’d think they would take into account the fact that there is absolutely no growth in any macroeconomically relevant sector of the economy. You’d think that when consumer spending is standing still; when corporate investment is standing still; when unemployment is still slowly trending upward; you’d think they would get the picture. But no. Somehow Mr. Draghi and the Central Bankers got to where they are now in their careers while harboring the delusion that a shrinking or stagnant economy will get started again if more people go into more debt. 

I somehow suspect that this is the result of an over-consumption of Austrian economic theory, but I will leave that topic for a later discussion. What matters here and now is that the ECB’s tentative plans to open yet more liquidity floodgates is a big sign of the political desperation that is spreading through the government hallways of Europe.

Desperate people do desperate things. When the desperate people are politicians with a lot of power, the consequences of their desperate actions can be devastating. It remains to be seen what more destruction Europe’s leaders can bring to their continent than they already have (please wait patiently to early 2014 and you will be able to get a full picture of Europe’s disaster in my new book “Industrial Poverty”) but given what the ECB is now contemplating, we have to assume that anything is possible and nothing is impossible.

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